Commercially reasonable manner

In good faith and in a commercially reasonable manner:

• cuts the crap: potentially unlocks a lot of negotiations and takes much of the line-by-line lawyering out of the others.
• The old “it presents heightened litigation risk” canard is bogus:
  • The oft-cited “litigation risk” of agreeing to act reasonably is an extremely remote one.
  • It hardly adversely affects litigation risk in any case: A dissatisfied client will take action, and there are plenty of legal devices it can use to imply or insert a requirement for reasonableness in any case.

Note also:

• FCA rules (including the “client’s best interest” rule – basically rule 1 of our conduct of business rules) impose this (at a minimum) as a conduct standard anyway.
• Both versions of the Industry standard ISDA CSA impose it as standard
• Clients like it. It is psychologically valuable and a good selling point.
• Recent, directly on-point case-law (Barclays v Unicredit) supports the (self-evident) proposition that in acting in a commercially reasonable manner one need only consider one’s own reasonable commercial interests, not one’s counterparty’s (how could we possibly know what those were?). Thus the burden of proof for a counterparty to overcome (how could it possibly know what our commercial interests are?) is therefore significant
• We do, in fact, always and only act in a commercially reasonable manner. If we did not, the franchise damage would be as material as any perceived legal risk.
• Having a commercially reasonable standard expressly stated in the documents to my mind encourages the correct behaviour of business and risk management teams, further minimising franchise and litigation risk.

In what follows I assume you’re a good egg; the sort of person who means what he says, says what he means, and gives a legal covenant only in circumstances where he has an honest intention of carrying it out. If you’re not of that fibre, you have no place here.

What should a self-respecting advocate think about the phrase: “in a commercially reasonable manner” - or ever “in good faith and a commercially reasonable manner”?

A more cautious soul than me might rail against it, but I say no: while there may be circumstances where one would want specifically to preserve the right to act in one’s absolute discretion without any room for argument, in most cases an obligation to act in good faith or in a commercially reasonable manner does not involves any great concession. It is hard to imagine a situation in which a good egg would deliberately otherwise; agreeing such language may help to persuade such a cautious soul against whom you might be arrayed across the wobbly bridge to consensus. It might unblock those negotiations where he had been saying “yes, but with that provision, your client literally would be entitled to do [and here insert some fantastically horrifying deed that your adversary - a chap otherwise apparently short of imagination - has managed to dream up] without any commercially reasonable basis for doing so” and so on.

Such cautious souls are rarely persuaded that it is not in a fellow’s interest to wantonly aggravate his client and contractual counterparties for the sheer fun of it, even though this is undoubtedly true.

Whatever the contract says, if a court finds that you have acted unreasonably or in bad faith, you should not expect much sympathy when you seek to demonstrate that, by the contract, you were entitled to act in bad faith.

The one argument against the general principal is that it is inherently vague and a potential source of dispute in itself. For certain key risk protections we do not want to give any grounds for dispute even though we will always exercise these rights reasonably and in good faith.

The sort of text we are considering to address this concern, is as follows:

Standard of conduct: Each party must act in good faith and (unless expressly entitled to act in its absolute discretion) in a commercially reasonable manner.

This allows us to explicitly except some rights (by making them “absolute discretions”) and also explicitly puts the onus on the person alleging bad faith/commercial unreasonableness.

The law

A good place to look is Barclays v Unicredit, which considered what a party must do if it is required to act in a commercially reasonable manner.

See also

• Good Faith and Commercially Reasonable Manner (CSA Provision)
• Implied terms (could a commercially reasonable standard ever be implied? In England, no; in the US, yes).